Welcome to Hospira’s second quarter 2009 earning conference call. All lines have been placed on listen-only mode to prevent any background noise. Following the speakers’ remarks, there will be a question-and-answer period.

I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may begin your conference.

We will be making some forward-looking statements today, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those indicated. A discussion of these factors is included in the risk factors and MD&A sections in Hospira’s latest annual report on Form 10-K and subsequent Form 10-Qs on file with the SEC. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments.

In today’s conference call, non-GAAP financial measures will be used to help investors understand Hospira’s base business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and Form 8-K issued this morning, and are also available on the presentations page in the Investor Relations section of our website.

With that, I’ll now turn the call over to Chris.

Chris Begley

Thank you, Karen and good morning everyone. The second quarter was another very good quarter for Hospira.

Net sales of $957 million were up 6% year-over-year or 11% excluding the impact of foreign currency. The growth was primarily driven by strength in Specialty Injectable Pharmaceuticals and Other Pharma and although Medication Management Systems saw a year-over-year decline due to last year’s record MMS quarter, sales in this year’s quarter were inline with our expectations. Adjusted diluted earnings per share grew a healthy 28% to $0.73 versus $0.57 last year.

The second quarter was also one of significant progress for Hospira, both in relation to our core strategic areas of Specialty Injectable Pharmaceuticals and Medication Management Systems, as well as our Project Fuel initiatives. Among our many notable achievements, Retacrit, our biogeneric erythropoietin continues to advance. To-date we have captured more than 30% of the biogeneric EPO market in Europe, despite being in the market for a shorter period of time than other biogeneric competition.

In addition to launching azithromycin, an anti-ineffective drug in the U.S., we added compounds already on the market to new countries around the world. During the quarter we launched eight on-market compounds into new markets. This included Gemcitabine. We continue to rollout this oncology drug in Europe, where we now offer it in nine countries.

In Medication Management Systems, we implemented our first Symbiq device in Canada. We also announced plans to integrate Symbiq with our EndoTool glucose management software, targeting a year end submission of the integrated system to the FDA.

We were pleased to announce contract awards with MedAssets, one of the largest group purchasing organizations in the U.S. In a first for Hospira, we were awarded an agreement for our IV solutions in addition to the renewal of our agreement for Infusion Devices. During the quarter, we also paid off the $300 million of debt that matured in June.

Project Fuel, we continue to make significant progress on. Our multi-phase program designed to drive operational excellence and top tier financial performance. With regards to the first component of the project optimizing our product line, we have now identified approximately 35% of our 7,000 plus SKUs that can be eliminated overtime and to-date have eliminated 10% of them.

We also made progress with our second component evaluating non-strategic assets. During the quarter we committed to dispose of certain businesses and earlier this month announced the sale of our critical care business to ICU Medical. This advances our efforts to simplify our product line and focus on our key strategic areas, better enabling us to drive future growth. We continue to consider alternatives for other non-strategic assets and products.

Finally, in terms of streamlining our organizational structure, we have now notified close to 40% of the targeted range of 1400 to 1500 positions we announced as our target for the project, which includes both physician terminations and natural attrition. We remain on track to meet the projects milestones we have communicated and will provide additional updates at our investor day in September.

Before turning the call over to Terry for sales highlights, I’d like to briefly update you on the economic environment and comment on our paragraph four challenge related to Oxaliplatin. Starting with the economy, despite continued softness in hospital admissions and elective surgeries, we have seen little impact on the Pharma side of our business, which saw very good results in the quarter and while interest in our Medication Management Systemproducts remain strong, the capital spending environment continues to be tightly constrained across the globe.

Moving to recent developments with regards to our Oxaliplatin litigation in the United States; we were pleased to receive a positive ruling last month from the District Court that our generic Oxaliplatin product does not infringe on the innovator’s patent. Because we had already received tentative approval for our product from the Food and Drug Administration, the positive court ruling should have led to our receiving final approval to launch this product.

However, the innovator has appealed the decision and taken other steps, that in our opinion continue to wrongly keep our generic Oxaliplatin off the market, despite our victory at the District Court level. We are aggressively pursuing every avenue to bring our safe and cost effective version of this important oncology drug to the market as quickly as possible.

With that, I’ll now turn the call over to Terry for more details on sales for the quarter. Terry.

Terry Kearney

Thank you, Chris and good morning everyone. I’ll remind everyone that references to net sales results will be on a constant currency basis, which excludes the impact of foreign currency fluctuations. Please refer to the table in the schedules accompanying our press release for the impact of foreign currency by segment and product line.

Global net sales grew 11% in the quarter on a year-over-year basis, mainly the result of strong performance from global specialty injectables, which increased almost 20% during the second quarter, as well as contributions from other Pharma. On a segment basis, Specialty Injectable sales in the Americas were up almost 25%, aided by a favorable year-over-year comparison.

You may recall that in the second quarter of 2008, we experienced significant destocking by a major U.S. wholesaler, following strong purchasing patterns in the prior two quarters. We quantified this as having negatively impacted second quarter 2008 net sales in excess of $20 million. Excluding the wholesaler benefit from the year-over-year comparison, SIP in the Americas still delivered strong performance during the quarter in the mid-teens.

Contributors to the growth include, increased wholesaler purchases of our anti-infected products, which we believe was due to recent concerns related to a protracted flu pandemic, an increase in certain wholesaler inventory levels as part of that new arrangement we established this year, strengthened Precedex, a proprietary sedation agent, benefit from our new GPO pharmacy contracts we established last year and several of our first to market drugs such as Rocuronium.

Net sales in Specialty Injectables in the European region increased 2% in the year, primarily as a result of strong Retacrit sales across 15 countries in which we currently sell the drug. Some of our newer drugs, such as piperacillin/tazobactam, generic insulin and gemcitabine also contributed to the quarter’s performance. Continued expected pricing pressure in oncology partially offset the region’s results for the quarter.

Specialty Injectable net sales in Asia Pacific increased 18%over the prior year’s second quarter. This solid performance in the region was a function of continued demand for certain products in Japan, combined with favorable results for piperacillin/tazobactam a relatively new drug for the region and cardiovascular products.

Moving now to devices, net sales of global Medication Management Systems decreased 2% in the quarter. This was not unexpected, given the difficult year-over-year comparison as well as the anticipated impact of capital spending constraints to customers purchasing decisions and implementation time lines. Having said that, our strong backlog coming into the year, combined with the increased year-over-year sales from dedicated sets enabled us to meet our expectations for the quarter.

On a segment basis, MMS sales in the Americas decreased 4% in the quarter, partly a result of the difficult year-over-year comparison. As we mentioned on our first quarter earnings call, last year’s second quarter was a record quarter for our MMS product line, reflecting pent up demand and strong pump places for Symbiq, as well as improvements in our implementation processes.

We continue to capture competitors’ share with 80% of our Symbiq placements for the first half of the year coming from competitive accounts. We also benefited from Symbiq installations in several large Canadian hospitals where we expect to introduce the French version of the device in the second half of the year.

In EMEA, net sales increased 5% mainly on continued strength in GemStar, our ambulatory infusion device, as well as solid dedicated set sales for installed Plum devices. During the quarter in a significant milestone for the region, we secured our first tender for MedNet, our safety software application in one of the largest hospital accounts in Saudi Arabia. MMS net sales in the Asia Pacific region increased 11%, mainly as a result of strong pump and set growth for Plum and GemStar.

Other Pharma also contributed to our positive sales growth in the quarter. Net sales increased 11% on a global basis in the quarter, primarily as a result of strong sales in our U.S. large volume solutions, which benefited from volume and price increases, as a result of the GPO solutions awards we gained in 2008. Contract manufacturing also contributed to other pharma’s improved performance in the quarter, driven by solid customer demand.

I’ll now turn the call over to Tom for an overview of our financial results.

Tom Werner

Thanks Terry and good morning everyone. Net sales in the second quarter exceeded our expectations at $957 million, up 6% on a reported basis from second quarter of 2008. On a constant currency basis however, net sales increased over 11%.

Adjusted gross margin in the quarter was 38.2%, compared to 39.6% in the second quarter of 2008 and this was slightly less than our expectations. Driving a lower margin was the foreign exchange impact of product sourced outside the country of sale, primarily related to product we make in Australia, as well as slightly unfavorable product mix.

R&D expense in the quarter was $53 million, down from $58 million in the second quarter of 2008, primarily related to the impact of foreign exchange, as well as the timing of certain R&D project spending. R&D as a percent of net sales was 5.5% versus 6.4% in the second quarter of 2008.

SG&A expense for the second quarter was $146 million, down 4% from $153 million for the same period last year. This is mainly a function of the impact of foreign exchange, the timing of some selling and IT expenses, as well as Project Fuel cost reduction efforts. As a percentage of net sales, SG&A was 15.3%, compared to 16.9% in the second quarter of last year.

Adjusted operating income increased 16% to $177 million versus $152 million in the second quarter last year and adjusted operating margin was 18.5%, compared to 16.9% last year. Interest expense was flat on a year-over-year basis. Our tax rate on an adjusted basis in the quarter was 21.5%. This was consistent with the first quarter of 2009 and our adjusted diluted earnings per share for the second quarter was $0.73 compared to $0.57 last year.

Project Fuel charges for the quarter included project related impairment and other asset charges totaling $0.40 a share; facilities optimization initiatives totaled $0.01 per share and Mayne Pharma acquisition intangible amortization totaled $0.06 a share. In addition, we recorded an impairment on marketable equity securities of $0.10 per share. In aggregate, these items which are excluded from adjusted EPS totaled $0.57 for the quarter.

Turning next to cash flow, cash flowfrom operations in the second quarter was $147 million, up from $109 million in the second quarter last year. This was driven primarily by the increase in net income adjusted for non-cash items. Now regarding debt, we announced a $250 million debt offering in May, to be used for general corporate purposes. These six-year notes generated significant investor interest and priced with a coupon of 6.4%.

Also during the quarter, we paid off $300 million of unsecured notes that matured in June. This was consistent with our commitment to pay down debt and maintain a solid level of liquidity. Our next debt maturity is for $375 million due in March of 2010. Finally our cash balance was $609 million at the end of the quarter, compared to $529 million at the end of the first quarter of this year and $201 million at June 30, 2008.

Capital spending in the quarter was $44 million consistent with the second quarter of 2008. Depreciation and amortization of $58 million in the quarter included $16 million of intangibles amortization. In total, this compares to depreciation and amortization of $64 million in the second quarter of 2008.

Moving now to Project Fuel; we made significant progress on our Project Fuel initiatives, including the components relating to complexity reduction, as well as evaluating non-strategic assets. This announcement earlier this month of the sale of our Critical Care business is a major achievement in this regard.

The Critical Care business was non-strategic for us and it detracted from our overall growth trajectory and margin expansion opportunities. The business generated around $75 million in global net sales annually. Due to the fact that it was a partnered business however, our Critical Care margins were well below our average overall margins and contributed only a few cents to earnings per share on an annual basis.

Regarding the agreement, ICU Medical is acquiring the commercial rights, intellectual property and physical assets of our Critical Care business for $35 million in cash. You’ll recall that we sold our Salt Lake City manufacturing facility to ICU in 2005 for $32 million. This agreement includes the Critical Care products we purchase from ICU as well as the few Critical Care products we manufacture ourselves.

Over the next couple of months, once the transaction closes we will enter into transitional services agreements or TSAs with ICU for up to 18 months to help facilitate the transition process. As part of these TSAs, we will continue to manufacture certain Critical Care products in our Costa Rica and Morgan Hill facilities, as well as provide ICU with sales support outside the United States.

The expected impact of the transaction to 2009 is a $11 million decline in net sales with no accompanying impact to adjusted earnings per share. The net sales figure includes the anticipated critical care revenue loss, offset by the revenue generated by the transitional service agreements.

Turning next to guidance; for our full year projections, we’re maintaining our global net sales projections of 4% to 6% growth on a constant currency basis. Starting with SIP, as Terry mentioned previously, our Americas special injectable growth in the second quarter was partially due to wholesaler activity, including wholesaler purchases of our anti-infective products in anticipation of a protracted flu pandemic.

Secondly, an increase in certain wholesaler inventory levels as part of the new arrangements we recently established. We also received a benefit in the first half of the year from our efforts last year to improve our market position with several GPOs.

All these items contributed to our strong first half sales in specialty injectables, but the benefit is not anticipated to continue in the latter half of the year, as wholesalers sell-off their inventory and some of our strategic actions with GPOs have lapped. As a result, we’re maintaining our full year SIP guidance for the Americas of 4% to 6%, with sales anticipated to be stronger in the fourth quarter than in the third as has historically been the case.

Next moving to MMS; we expect to see continued constraints on hospital capital spending, which is adversely impacting customer signings and deferring implementations. We expect more of the same till the economic recovery is underway.

In terms of new contracts, we’re seeing stronger demand from our plum devices as a certain segment of customers are looking for an upgradeable device at a lower price than Symbiq. We believe these trends will continue in the second half of the year. Because of this, we believe it’s appropriate to maintain our growth guidance for Americas MMS in a range of 4% to 6%, with stronger sales anticipated in the fourth quarter than in the third quarter.

On the margin front, we expect gross margins in the third quarter to return to first quarter levels as improving Project Fuel savings are partially offset by our seasonal factory maintenance shutdowns. With fourth quarter margins expected to be the highest of the year, we’re maintaining our adjusted gross margin guidance of 39.5% to 40%.

Next moving to R&D, we attributed the decline in second quarter spending to timing delays on certain projects, which are now projected to take place in the second half of the year, along with the spending allocated to them. This coupled with the affect of foreign exchange will bring our adjusted R&D as a percentage of revenue to our original guidance range of 5.8% to 6.1%.

Turning next to SG&A; in the back part of the year SG&A spending is expected to increase, due to the impact of foreign exchange, some additional promotional spending for Precedex, as well as the timing of various other expenses. Although Project Fuel savings will increase in the second half somewhat, this will be offset by additional spending for various IT and sales force initiatives that were delayed from earlier in the year.

As a result, SG&A will increase slightly as a percent of sales in the back half of the year, compared with the first half, but we’re maintaining our guidance range of 15.3% to 15.6% for SG&A, reflected as a percentage of sales. From a gating perspective, both R&D and SG&A will be relatively flat from the third quarter to the fourth quarter on an absolute dollar basis.

Moving finally to Project Fuel and our EPS guidance; we still expect Project Fuel savings to be in the $8 million to $10 million range as we previously indicated and due to our strong first half of the year and our confidence in meeting the favorable ends of many of our sales and expense guidance ranges, we’re increasing our adjusted EPS guidance to $2.70 to $2.75, which is a 7% to 9% increase over prior year. This compares to our previous guidance of $2.67 to $2.72 per share.

With that, I’ll turn the call back to Chris.

Chris Begley

We made significant progress in the second quarter and we’re extremely pleased with our performance, especially given the difficult economic climate. Generating low double digit revenue growth and increasing adjusted earnings per share by almost 30%.

We remain well positioned for the remainder of the year and continue to focus on Project Fuel and delivering our financial commitments. We believe our initiatives will drive both short term progress and long term sustainable growth. We look forward to reporting further progress to you next quarter.

Let’s start with maybe gross margins again. You all highlighted that it was slightly below your expectations. Can you dig into that a little more for us, currency and mix? I would have thought that given the Project Fuel, the exiting from North Chicago, some of the new product launches, that they would have been stronger. How do we think about all of these pieces, especially going forward?

Tom Werner

Hi Rick, it’s Tom. You’re absolutely right. As we gave our guidance for the second quarter and beyond at the first quarter call, we did factor in Project Fuel savings in North Chicago, etc. What happened in the quarter frankly are really two things; we had stronger performance in I.V. solutions and slightly less than what we expected for MMS. So you get some mix issues there and then this is about half and half.

The second half of the margin sort of short fall to our expectations was really related to foreign exchange and this gets a little bit complicated, but essentially the Australian dollar, Canadian dollar and the Euro have tended to move in parallel, even throughout all of these volatile currency moves over the last 18 months. This last quarter was an exception though, and the Australian dollar actually moved about 15%; it strengthened against the U.S. dollar, whereas the other currency strengthened only about 5%.

Given what we manufacture in Australia versus what we sell, our natural hedges that we normally have plus the fact that these currencies always sort of move in tandem didn’t happen in the quarter, so we suffered from that. You’ll also see the impact of that showing up in the European operating margins.

So Project Fuel happening as we expected, North Chicago happening as we expected, the two things that were a little bit unexpected were some of the sales mix, which we think will come back into balance in the back part of the year. The currency where the Australian dollar is at right now, we’re going to take some steps to try to mitigate that. Should it not change, we could see similar impact in the back part of the year, but I think we’ve got enough offsetting that to get us back to the margins that we indicated.

So nothing fundamentally different with the business; just some mix issues and some currency things that we’re a little weird frankly.

Rick Wise - Leerink Swann

Yes, and that leads into guidance. I’m still a little bit confused why you’re not raising the guidance more in the second half, given the excellent second quarter performance.

I mean I hear the higher spending and the manufacturing downtime, but it seems like in general the business is doing better, you guys have done a good job of being conservative, Project Fuel is happening faster. Basically, you’re saying taking the mid-point of your range, that the second half from an EPS perspective is going to look a lot like the first. Why shouldn’t we think you’re being very conservative? Sorry for that.

Tom Werner

I guess that’s up to you. The way I kind of looked at it, the back of the envelope is depending on how much of the beat you would ascribe to us. I know you were at the lower end of the range of the various estimates, but a lot of the beat in the quarter were the SIP issues that Terry outlined, which we feel were somewhat one-time in nature.

Also in the back part of the year as we indicated, R&D spending because of some project delays, that’s probably going to consume $0.04 or $0.05 of the beat. We take the guidance up about $0.03, so then you’re looking at $0.02, $0.03 or $0.04 as being consumed with some additional spending and plant shutdowns.

I think we’ve thought it through pretty well. I don’t know that we’d say we’re conservative or optimistic. It’s kind of down the middle of the fair way as Chris likes to say, but that’s sort of the back of the envelope. Some things that were a bit one-time, although from a quality of earnings standpoint, this is revenue, this wasn’t anything going on in the rest of the P&L and the rest of it’s largely expense timing.

Rick Wise - Leerink Swann

I appreciate that. Thanks.

Operator

Your next question comes from Marshall Urist with Morgan Stanley.

Marshall Urist - Morgan Stanley

Hey, guys. Good morning.

Chris Begley

Hi, Marshall.

Marshall Urist - Morgan Stanley

So, a couple of questions; the first one, could you talk a little bit more or at least quantify the kind of one-time wholesaler a kind of swine flu purchasing that you saw in the quarter? Do you guys have a sense of how much that was?

Terry Kearney

Marshall, this is Terry. Let me sort of try to walk you through this 25% increase that we saw in SIP for the Americas. Again, just coming back to what I said earlier, about a third of that increase was related to the prior year destocking, okay, the $20 million that we had talked about, so that leaves another two-thirds.

Then another third is really a combination of a number of things and that would be these wholesaler arrangements that we entered into in the first quarter, where the wholesalers were obligated to build inventories to a certain level. We don’t expect that impact to repeat.

There also was the anti-infective buy-ins that we talked about for the pandemic. Those we do think, we’ll probably burn down over the next third and fourth quarter and then finally the other part of that third is also the impact of those pharmacy contracts and awards that we had last year, the strategic award that we went after that have now lapsed and we don’t see an impact in the third and fourth quarter, because they really started last year in the third and fourth quarter. So those three items together make up the second-third of the increase.

Finally, the last third is really new products, prospects growth and competitive supply issues where competitors haven’t been able to supply the market. So I would say that’s how we look at it. Again that middle third, most of which will either not repeat or will be burning down in this third and fourth quarter.

Tom Werner

Marshall, its Tom. Our insight into what’s going out with wholesalers because of the new agreements, we’ve really got very good visibility right now to be able to pinpoint a lot of these different factors.

Marshall Urist - Morgan Stanley

Okay, now that’s really helpful. Then what kind of number would you guys put on sort of end market or volume growth, kind of stripping out all of this for the quarter?

Tom Werner

Well, if you look at the IMS data through May, which is what we have access to, we see the market actually going down about 2%, whereas if you look at the pure IMS data without any adjustments for Hospira, we’re up about 10%. Again, some of that’s driven by the wholesaler activity as well. So we’re up in a market that’s going down.

Marshall Urist - Morgan Stanley

Okay. Then on MMS, correct me if I’m wrong. It sounded like, you guys are maybe sequentially a little bit more cautious on the kind of spending environment and prospects for placements in the back half of the year and then, maybe also comment on the mix shift you guys alluded to towards Plum and kind of how big of an affect is that having as we think about sort of revenue versus volume?

Terry Kearney

Well let me start with, clearly we are tracking to our expectations for the first half, that’s the positive news. I’m not sure I’d characterize or forecast for the remainder of the year being somewhat conservative. As you really look at the numbers and squeeze it from the data we provide from the range, we still have some growth to achieve in the second half of the year over the first half, and that the market conditions really haven’t improved any.

As Tom said and I said as well, there is certainly a constrained market and purchases when they do occur are tending towards and biased towards the lower ASP type of devices and so that’s clearly what’s happening. Again, if you look at our performance to-date, our placements are tracking, but there is a mix shift as Tom alluded to.

We are seeing more Plum than Symbiq, primarily because of this price bias that we see in the market today. We have planned that going forward and we think we have it in good balance and as we look at our pipeline and our sales funnel, if you take the high probability signings and what we have as a backlog, we feel pretty good about the numbers that we’re forecasting for the full year.

So bottom line, I think it’s not conservative. I think there’s some good stretch there. Again, the market conditions are not improving. We think we have a good handle on it and we’ll continue to see how it plays out for the remainder of the year.

Marshall Urist - Morgan Stanley

Okay, and then that kind of one quarter delay relative to previous expectations in terms of placements, is that still holding so far through the second quarter?

Terry Kearney

Quite honestly, I think it’s all over the place right now. There are again a variety of things happening, customers signing and implementing immediately. Some signing and waiting upwards to two or three quarters.

So they want to get the commitment, they want to lock in the price, but they will hold-off on the implementation and obviously that holds-off the revenue recognition. So, I don’t think there is any one general rule of thumb that would apply in today’s market. It is what it is and you take what you can get.

Marshall Urist - Morgan Stanley

Okay, and then last question is just on Oxali. Obviously the innovator is working hard to protect that. Can you guys just give us a little bit more detail? I mean the appeal is there, the other steps you guys have talked about and if there is kind of any timing visibility there?

Chris Begley

Yes, this is Chris. Let me walk all of our listeners through the Oxaliplatin situation and for those of you who may not be as familiar, I’ll go into some background as well. The appellate court has issued a stay in the case and we obviously are pursuing several different avenues to clear the pathway for the launch on the product and I obviously can’t cover that from a legal strategy standpoint.

While we are doing everything we can to expedite the matter, we don’t have any type of definitive timeframe on launching of the product and that’s why I think it’s important to understand, it’s not in our guidance, okay, it was not in our guidance, and its still it’s not in our guidance or forecast.

The other thing that’s important to keep in mind as well is the safety and the efficacy of our product is not an issue at all, as evidenced by the fact that we do have this tentative approval that we have on the product, okay, so I think that’s important as well.

The other insight I guess I would give our listeners is the following and that is our understanding is that the issue relates to the impact of generic competition to the drug, which should not be licensed from a company called Debiopharm, a Swiss company.

In seeking to stay, Sanofi and Debiopharm argued that the generic entry would cause both companies irreparable harm in the form of irreversible price erosion and irretrievable loss of business and research opportunities and the elimination of jobs and so that is our understanding of the Oxaliplatin situation as of today.

Marshall Urist - Morgan Stanley

Okay, great. Thanks guys.

Operator

Your next question comes from Taylor Harris with JP Morgan.

Taylor Harris - JP Morgan

Thanks a lot. Just want to go back to the SIP business and the underlying trends. So, as you said IMS data has you up in the double digits for the first half of the year. I think your guidance has been 4% to 6% in the Americas; is that still your guidance?

Terry Kearney

It is Taylor. This is Terry. Again when you look at the IMS data relative to and reconcile it to our reported sales, there’s a number of things that are occurring that we have to sort of adjust and again, through May which is where we have access to IMS data, there’s no doubt it’s showing that our end market sales are low double digits.

Once you adjust out some other things that are in our reported sales, but not in IMS, direct sales to government, things like pre-filled flush syringes that aren’t in IMS, you make those adjustments, it does temper that growth into the high or mid single digits. So I think it is a line that is up pretty nicely with our guidance on a year-to-date basis.

Taylor Harris - JP Morgan

When you factor in some of the wholesaler stocking that you had in the second quarter?

Terry Kearney

Yes, as well, correct.

Taylor Harris - JP Morgan

Okay and on the GPO award, I understand you lapped a number of those awards here in the third quarter. What are you seeing from Premier that might offset that?

Terry Kearney

We think we’re going to do fine with Premier and we think that there will be some slight benefit towards the end of the year based on what we’ve done with Premier, so that has also been factored into the guidance that we’ve provided, so we’ve considered that.

You know how we operate on all GPO awards. We either expect to maintain or expand and we’ve approached Premier the same way. So we’re going to see some benefit from that towards the end of the year, but again, not enough to give us any reason to move outside our 4% to 6% guidance range.

Taylor Harris - JP Morgan

Okay and when you look at the market, you mentioned down 2%, is that a volume decline or is there a negative price factor and then maybe just tell us what you’re seeing in your portfolio for pricing?

Terry Kearney

Yes, what I quoted was on a dollar basis, I didn’t quote units. So I have to go back and look up the unit. I don’t have it right in front of me Taylor, so I can’t speak to the unit volume.

From our portfolio, from SIP in the Americas, we actually see slight price increase on a quarter-over-quarter basis, year-over-year basis, based on the escalators that we have in our GPO contracts. So we’re seeing some favorable price impact in the quarter versus last year’s second quarter.

Taylor Harris - JP Morgan

That’s pure pricing. How about on the mix side? I assume you’re still getting a little mix benefit as well?

Terry Kearney

A little; I mean the anti-infectives are strong, but relative to the major one, we had pretty strong quarters last year as well, but generally the mix is decent. I wouldn’t say it’s anything unusual.

Taylor Harris - JP Morgan

Okay and then in the internet’s business, can you give us a sense of what placement has done year-over-year in the first half of the year in terms of a decline?

Terry Kearney

Yes, they are down as we predicted. I think as we talked about earlier in the year relative to guidance, we expected placements to be down around 10% and that seems to be tracking. As I indicated when you look at and you step back, we are tracking to our first two quarters first half of the year, but again in total placements, we’re pretty much where we want to be. It just happens to be the mix is more biased towards Plum versus Symbiq.

Taylor Harris - JP Morgan

Okay, and roughly what is that mix Plum and Symbiq?

Terry Kearney

I’m just guessing off the top of my head from memory, I think it’s somewhere around 60/40 or so.

Taylor Harris - JP Morgan

Okay and your comment was that of those Symbiq placements, 80% are from competitors?

Terry Kearney

That’s right. Again, Plum we also captured competitive accounts as well. So it’s not just limited to Symbiq.

Taylor Harris - JP Morgan

Great and my last question is Retacrit outside the U.S. You mentioned 30% share of the generic opportunity. Is that just in oncology or does that include the dialysis population as well?

Terry Kearney

It includes both and again just to be transparent about it, the IMS data that we have is not perfect, it doesn’t cover every of the major markets that we’re in. It does a pretty good job. So we have to augment it with our own internal market research.

What we’ve seen as we look across the continent is that we do believe we are now in excess of 30% on the overall biogeneric EPO molecule, is the first generation if you will, the short-acting product, but to put that in perspective so we don’t get carried away, we also see that the biogeneric version of EPO has probably penetrated about 5% of the overall market at this point in time.

Taylor Harris - JP Morgan

Okay great. That’s all for me. Thank you, guys.

Chris Begley

Thank you.

Operator

Your next question comes from Junaid Husain with Soleil Securities.

Junaid Husain - Soleil Securities

Good morning guys.

Chris Begley

Good morning.

Junaid Husain - Soleil Securities

Chris or Terry, we’ve already heard from some of the publicly traded hospitals that admission trends are actually fairing reasonably well. So, is it safe to assume that maybe in the U.S. some of the strength that you’re seeing is a function of better than expected hospital volumes?

Terry Kearney

Well, I’m not sure what you’re hearing or what you’re looking at. The data we typically look at and we continually cite would indicate whether it’s the last three months or last six months; that ambulatory surgeries and patient surgeries and the like are actually down. So they don’t seem to be eroding any more. There may be some stabilization relative to consecutive quarters, but certainly on a year-over-year basis they continue to trend down.

Junaid Husain - Soleil Securities

Then Terry, sorry if I missed this, relative to medication management, could you give us a sense for what the orders look like in the second quarter? I think we had Cardinal with the ship hold on their pumps in the quarter and then Baxter with the continuing pump saga, so at the end of the day Hospira was the only game in town for pumps in the second quarter. So just wondering, how you guys fared on the orders front?

Terry Kearney

We’re doing fine. Again as I mentioned, we’re certainly tracking our first half expectations that we set for ourselves and again Junaid, not to mince words, this is a tough market today, because there’s not a lot of capital available and there’s a lot of people are who just are holding up purchases. So, I guess I would say if you’re going to have issues, it’s probably a good time to have them, because the market isn’t as robust as it has been a year ago.

So, we are making good progress as I mentioned. When you look at our order book going forward, what we have from a signed basis, as well as what we see in our pipeline, we still feel pretty good about achieving the numbers that we’ve signed up for, which is at 4% to 6% growth, which I think obviously I believe most everyone else is going to be down year-over-year.

Junaid Husain - Soleil Securities

Then any updates on Zosyn?

Terry Kearney

No, we areobviously in continued dialogue with our partner. There is no new update other than again, it seems to be the only hold up is the resolution of the citizens’ petition and we’re hopeful that will come eventually, but as you know we’ve taken it out of our guidance and if it does happen, it will be upside.

Junaid Husain - Soleil Securities

Thanks, and then Tom, just a little bit of house keeping. Could you tell me what the DSOs were for the quarter and then how it compares to last quarter and then the previous year?

Tom Werner

Yes, off the top of my head, I think DSO was 57 in the quarter. Let’s see here; sorry 59 and then last year was at 63. Now I wouldn’t read anything into that in terms of improvement. With foreign currency moves and how various translation exercises take place between the balance sheet and income statement, you get some anomalies there.

Overall we’re not seeing a deterioration in our aging whatsoever. Collections continue to be real good in the U.S. We continue to see in Southern Europe on the other hand, just the extended DSO that we’ve always seen. So really nothing new there and I wouldn’t read a reduction in the DSO as any indication that things are improving. I think we’re kind of holding our own.

Inventory, my DIOH, I think that was the second part of your question is just up a couple of days from last year, so nothing unusual there.

Junaid Husain - Soleil Securities

Thanks, that’s helpful and then last question for Chris, more high level, if I could lob in the obligatory health care reform question. Whether or not the bill moves to the President’s desk by October or not, from the proposal you’ve seen so far, what’s your opinion especially for some of the ramifications it might have for your hospital customers?

Chris Begley

Sure. Junaid that’s a hard question to answer, because there is a variety of different proposals that are being developed and I don’t think anyone at this point in time has a high level of clarity of what will actually end up going to the President’s desk.

I would say though, that we obviously are disappointed that there wasn’t something done before the recess and I would also add in there, I think the longer that this takes, the more we end up with not health care reform, but some type of legislation that is as I’ve called it before, ‘health care reform light,’ something that is not really reform in nature, but more just legislation that gets passed, but what form that will take, it’s just too hard to tell at this point in time.

The final comment I’d make as we look across the whole landscape from a Hospira standpoint only, because your question was really for our hospital customers, we believe that we’re still part of the solution versus the problem, by having this broad portfolio of generic injectable drugs to help keep the costs down for our hospital customers.

Then everything that we’re doing as it relates to MMS is software related, that improves overall performance and also takes and frees up additional time from a clinical standpoint. So we think we’re well positioned for any legislation that would go forward.

Junaid Husain - Soleil Securities

Thanks Chris. That’s actually very helpful.

Chris Begley

Thank you.

Operator

Your next question comes from Bonnie Suboku with Longbow Research.

Bonnie Suboku - Longbow Research

Good morning. Thank you for taking the call. First a question on your mix within the MMS segment; you said that Plum sales this quarter, a lot of those were competitive placements. Any idea what percentage that might be?

Terry Kearney

For Plum? I don’t remember off the hand, I think it’s maybe somewhere close to 40%.

Bonnie Suboku - Longbow Research

Okay. 40% competitive, and how does that change if at all the way you think about this in your Symbiq sales for the remainder of the year and then moving into 2010 given that some of these competitive placements are for the lower-priced product. In terms of life cycle, how is that change you’re thinking in terms of your ramp up of Symbiq in the marketplace?

Terry Kearney

I don’t think it changes at all. The important thing to consider is the fact that we have a broad portfolio to offer to our customers that meet various clinical needs at various price points. So whatever the customer may need relative to clinical capabilities or price, I think we have very, very good products to offer them. So we remain very competitive across the spectrum of needs that our customer has.

As you go forward, Symbiq is a great device. It still has a lot of interest. How we continue to position it and how well it does really is going to come down to whether or not there is more access to capital and a greater sense of economic turnaround at the hospital level.

The hospitals are still for the most part keeping their powder dry and they’re replacing pumps when they absolutely have to do so. Again depending on their financial condition at that particular hospital, they may be again biased to a lower-cost alternative.

Again for us, if they choose Plum it’s a good thing, because Plum also has upgradeable opportunities and as far as we’re concerned, especially on a competitive level, it does put us in the hospital and it does give us an opportunity down the road to upgrade it to Symbiq.

Chris Begley

Bonnie, the one thing I would add to that as well is, Symbiq was developed to have increased computer workhorse space, capabilities, etc, so it really becomes a question of how much more incremental value can we continue to add into the Symbiq device. As I talked about in my opening comments, by the end of the year we’ll be submitting to the FDA and integrated EndoTool software into the Symbiq device, which brings incremental value to the customer.

So Symbiq will be all about having a computer by the patient bed-side that brings not only infusion capability, but incremental decision support capabilities for our customer as they get more and more pressure from Health Care Reform or any type of health-care legislation.

Bonnie Suboku - Longbow Research

Okay. Thank you, that’s really helpful. On the injectable side, you talked a bit about a lot of these one-time events occurring in the first half, the ramp up and the wholesaler stocking levels and so on, but do you think that perhaps what we’re hearing from some of the hospitals that have been releasing their results so far, that we might actually be seeing a greater concern about flu going into the second half of the year and that those levels may stay where they are for the second quarter or even ramp up further?

Terry Kearney

You know, it’s all entirely possible, but that’s not the way we put our forecast together. Again as Tom indicated, we do monitor the wholesaler levels. We think at this point in time with the second quarter, that probably the levels are a little high from an anti-infective perspective from normal levels and so we do expect burn down.

Again, I think it’s anybody’s guess on whether or not there is a bigger concern come to fall when the flu season starts to kick in, and again the measures that various governments around the world including the U.S., take to vaccinate their population.

Clearly if in fact there is a widespread pandemic, which we don’t hope for, we should benefit from our anti-infectives and even possibly our IV solutions as depending on the severity of the flu season, but again, we’re not necessarily banking on that today and we’ll see how that plays out as the year evolves.

Bonnie Suboku - Longbow Research

Okay and on your SIP in Europe, do you have any expectations for your Retacrit to sort of exceed those levels or you thought you’d be at this point seeing how successful you’ve been so far in the expansion that you’ve had?

Terry Kearney

No, we’re still holding our earlier guidance on a constant currency basis, 1% to 6%. So part of that growth is going to be Retacrit, no doubt about it and some other new product launches, but again tempered by our expected price whereas in arose in oncology.

So Retacrit is doing well and again, it’s going to be a little bit of a slow process because of building adoption and awareness, but again we are pleased with our results, because we weren’t the first to market across these various countries and yet we’ve made a real good stab at growth and getting to this position where we believe we are the number one biogeneric alternative.

So we are pleased with the growth, but again, I think we have it called fairly well, we still expect more growth for Retacrit second half versus first half. So I think we have it pegged pretty well.

Bonnie Suboku - Longbow Research

Okay thanks, and just finally on your SG&A guidance, you talked a little bit about sales force initiatives. I wondered if you could comment on that, given your 1400 to 1500 work force reduction and your sales force initiatives. Give us a little color on what those two things are?

Terry, how much has Vanco pricing been affected by the two newer entrants and are you factors in additional entrants for the remainder of the year?

Terry Kearney

On a year-over-year basis Greg, no doubt there’s been a slight decline in Vanco pricing. We’ve been obviously very aggressive in maintaining our share position, so that’s been pretty much the game to-date.

Relative to the current competition, they continue to stay fairly rational from a pricing perspective, so nothing new to report this quarter versus the first quarter. As far as, any new entrants coming into the market, we have not built anything like that into our guidance going forward.

Greg Gilbert - Banc of America

Okay. If you win your tax, it’s your case next year and can launch after the compound patent expires, I think around mid-year, would supply be an issue for this product? Is it hard to source like paclotaxilers [ph] or is it a simpler?

Terry Kearney

No, we don’t expect any sourcing issues with that product.

Greg Gilbert - Banc of America

Okay, and then Chris, I’m not going to ask you to predict the outcome of Biosimilars Legislation, but I’m interested in knowing sort of what are the key decisions that you need to make as you think about your U.S. strategy on Biosimilars and whether those decisions are in any way linked to what legislation looks like?

Chris Begley

Greg, on the biogeneric legislation, as long as there’s some type of health care reform legislation that goes forward, I’m still confident that biogeneric legislation will be a piece of that as an offset for paying for any incremental coverage.

Then the question becomes, what form does it take and obviously, we were disappointed with the senates recent recommendation for 12 years worth of data exclusivity for branded biological drugs and we still support the five-year standard for data exclusivity, which is actually in Chairman Waxman’s legislation that he has prepared.

As it relates to our pipeline, as of today that we publicly have talked about and what we’re working on, no matter what happens from an exclusivity standpoint, it will not impact what we’re going to do from a launch date standpoint. The exclusivity period really will revolve around more as it relates to future pipelines way out into the future, as biotech companies and big pharma continue to develop biogeneric drugs.

So short term, medium term, I don’t see an impact on the form of the legislation. As we talked about before, if for some reason that was not legislation that was passed in 2009, we still have some time as it relates to going into 2010, where we’ll be able to continue to do our work with a certain set of assumptions, but we would really like by the end of 2010 to have some type of clarity from a biogeneric legislation standpoint in the U.S. Does that help, Greg?

Greg Gilbert - Banc of America

Yes, it does and one more for you Chris. Having been through a spin off and not that you want to offer advice to a competitor, but how do you think the CareFusion spin will affect them as a competitor? Thanks.

Chris Begley

You know what, if he wants to pick up the phone and give me a call, I’ll be happy to give any assistance I can. One of the interesting things is when you’ve led a company that spins out from a much bigger company, we become kind of a unique club and don’t mind sharing our experiences with other people and I’ve done that over the past five years with spins even outside of health care.

I will say publicly, it’s probably one of the most invigorating things that can happen to the people in the company and also the company. I will also say though, there’s a whole lot to learn as well and so if he wants to pick up the phone and give me a call, I’ll be happy to help.

Greg Gilbert - Banc of America

Thanks.

Operator

Your next question comes from Rick Wise with Leerink Swann.

Rick Wise - Leerink Swann

Hi, just a couple of quick follow-ups. Chris, I’m going to follow-up on that last question. I was going to ask that as follow-up as well. I mean 80% of your second quarter growth in the Americas, if I heard you correctly, is from competitive accounts.

How sustainable do you think that is, I mean, as those competitive wins versus your other two competitors? And you sort of touched on it that CareFusion is likely to be invigorated by the spin. Yes, there are challenges, but just like you were, you’re a better company today.

Chris Begley

Rick first of all, let me clarify something. The 80% competitive was on Symbiq alone. Keep in mind, Symbiq was really designed to go after competitive accounts and to take infusion delivery to a new level as it relates to decision support.

We like competition, okay? We are really good at pushing ourselves and driving the organization, but a good competitor makes you a better company and so, we don’t mind a good competitor. I think as it relates to our ability to capture infusion device share in the marketplace, I think what we all need to keep, in mind just like Baxter and CareFusion will continue to evolve, our intent is not to standstill either, okay? So we’ll continue to evolve our product line, what we offer to the customer from a value standpoint, etcetera.

So to me, there is just a tremendous opportunity because of this gigantic unmet need as it relates to reducing medication errors, giving clinicians more support so they can make the right decisions by the patient bedside, that will drive us to I believe new heights and new market share capabilities as well.

On the CareFusion front, they’ll be distracted by the separation. It takes a tremendous amount of time and energy and if they’re able to get through that piece and focus on the customer, they’ll probably end up being potentially a stronger competitor and a stronger supplier for the patient as well, but we’re not going to stand still and let anyone surpass us, whether it’s here in the U.S. or around the world.

Rick Wise - Leerink Swann

Okay and just one last quick one. Did I hear you correctly that there are indeed more potential sales of non-strategic assets ahead? Just wondering if we could expect that, if I’m correct in hearing you yet this year as a possibility, and I assume that if that happens, that would be better, again something helpful to margins. Thanks so much.

Tom Werner

Hi Rick, it’s Tom. We’ve identified a couple, one or two other businesses, but they’re small, but to predict for potential divesture, but to predict the outcome, it’s just too early to tell.

The Critical Care line obviously we announced and should close here in the next three or four weeks, but identifying it’s pretty the easy part, than marketing it particularly in today’s environment and finding the right kind of buyer is a lot of times more difficult, so I just wouldn’t go out on a lim and predict anything at this point.

Rick Wise - Leerink Swann

But it should be helpful to margins if and when it happens?

Tom Werner

Right, but understand they’re small businesses, so it wouldn’t move the needle much.

Rick Wise - Leerink Swann

Thanks so much.

Operator

And our final question comes from Taylor Harris with JP Morgan.

Taylor Harris - JP Morgan

Thanks, a couple of follow-ups. So Project Fuel, I want to make sure that I heard you right. There’s no incremental benefit in ‘09 from what you had previously stated; is that right?

Tom Werner

I’m sorry Taylor, could you repeat that?

Taylor Harris - JP Morgan

Project Fuel; you’re still anticipating the same positive benefit in the year 2009 as what you’ve stated previously?

Tom Werner

That same $8 million to $10 million, correct.

Taylor Harris - JP Morgan

Okay. I think that you upped the number of SKUs that you were thinking about eliminating from 30% to 35%; is that right or has it always been at the 35% level?

Tom Werner

Well, I’ll you, we’re kind of all looking at each other, it is 35%. We’re just kind of scratching our heads trying to remember 30%, but maybe we did.

Chris Begley

I think it’s been consistent 35%, I think.

Taylor Harris - JP Morgan

Okay, and you’ve already eliminated 10% of the skews. In the process of doing that, have you found, what’s the reaction from hospitals been, positive, negative? Do you think there’s been any revenue slippage or not?

Tom Werner

The best way to answer that Taylor, is the initial skews that we’ve eliminated are really the low-hanging fruit. So those were the kind of the easy ones and so the customer reaction has been really nonexistent, okay.

We have had considerable conversations with hospitals and GPO on the skews that are coming up and I would say that they all understand the importance of standardization and eliminating complexity.

In fact that’s what they’re going through right now as well and so I actually think our initiative will help them in standardizing their product line, especially as it relates to when you start thinking about the fact that in hospitals today, there’s still a lot of contract nurses, nurses that rotate from hospital-to-hospital and so having a more standardized uniform product makes a whole lot of sense for them as well.

In fact, it’s one of the ways of pulling costs out of the system is by standardizing and simplifying. So, they’ve been receptive to what it is we want to do and so they get it and so I don’t envision that being an issue as we move forward.

Taylor Harris - JP Morgan

And what’s the time line for eliminating all of those skews? Is it done by mid year 2010 or does it take till the end of the year?

Terry Kearney

There is a process that supports this Taylor. First and foremost, we stop ordering raw materials and then we work it through, but quite honestly, it really doesn’t get eliminated until the last lot expires from our system. That’s the way the definition works, because as long as there’s product in the marketplace, we have to track it. So we haven’t eliminated all the activity around that skew, until the last lot of that skew expires.

So, I would say a lot of it gets done by the middle of next year, but they will still continue to trail out in 2000, end of 2010, maybe possibly ‘11 as well.

Tom Werner

Yes, and let me embellish that a little bit, because as Terry mentioned, the first step is to run out the inventory. The inventory has to be all gone and then what happens is, believe it or not, even we’ve got to continue to log in complaints from an FDA standpoint until we know all the product is exhausted in the marketplace.

So, the total costs coming out of our system end up taking a while to go through the system. As Terry said, I think it’s like mid 2011 before we’re actually, totally out of these skews, meaning we have no more FDA obligation, no more obligation to customers, etc.

Taylor Harris - JP Morgan

So yes, a couple of follow ups just on that; does that mean we should expect inventory turns to be coming down over the next couple of years?

Terry Kearney

Inventory turns will be going up.

Taylor Harris - JP Morgan

Sorry, I’m sorry, yes. Inventories come down as you burn through that inventory on hand?

Terry Kearney

Inventory should come down, things will go up. I think you look at the critical care divesture, I mean it’s small, but you do enough of those, plus the simplification, that’s what this is all about. It’s cost, but as well as reduction in working capital investment.

Terry Kearney

We’ve talked a lot about the high service levels that we have for our customers here in the U.S. and then after the Mayne acquisition we’ve been able to do that outside the U.S. as well. So if you think about the simplification, the reduction of the skews, it will make it easier and more cost efficient for us to keep those high service levels for our customer.

They get that as part of the explanation as well, which is why they receive this from a positive standpoint, but will also take and drive economies of scale in our manufacturing operations as they’re able to run the bigger lots, and run those bigger and get rid of the small lots that are very inefficient in our automated manufacturing facilities.

Taylor Harris - JP Morgan

Right and then last question on Fuel is just, are there 35% of skews; are there any that you consider higher risk from an elimination perspective than others, and are you saving those towards the end, or is all of this about you view it in the same risk category?

Terry Kearney

Taylor, I view this all in the same risk category. We just want to make sure we do the appropriate due diligence, communications to our customers, etc and as long as we use a very methodical process, not slow, but methodical process touching all the right bases and communicating internally and externally to all of our stakeholders, I view the whole thing at the same risk level and I don’t view it at a real high risk level at all.

Tom Werner

Taylor, its Tom. We hope to share a lot of this in more detail with you at the Investor Day in September. I just would remind everybody that this complexity reduction, the skews we’ve identified, they don’t generate much revenue. So whether they’re high risk or not, the risk to the top line, just because of the low contribution of these skews, just really isn’t anything that we’re worried about nor would we differentiate.

Taylor Harris - JP Morgan

Okay, that’s very helpful. Project Fuel is obviously a huge potential driver. I’m just trying to make sure we’re not missing any risk. So thanks for that and my last question on contract manufacturing for our modeling purposes, can you just help us understand the phasing of how that revenue is going to go away as the TSAs run off?

Tom Werner

For critical care?

Taylor Harris - JP Morgan

Yes.

Tom Werner

Well, it’s 11 this year and you sort of ramp that, I think we’re out by the beginning of the fourth quarter of next year.

Terry Kearney

I think we talked about $75 million in critical care sales, so that will trail off throughout the year. Its contract manufacturing, as well as just the transfer of international rights to ICU and us no longer supporting the product line.

Tom Werner

Once these TSAs are done, perhaps at our next call, there’s going to be some milestone dates. I wouldn’t ratably sort of ramp this, because there are just going to be certain dates where events happen and then it’ll be more of a step function. It’s just we don’t have all the dates finalized right now.

If you needed to do something right now, maybe you do a gradual ramp, but the back part of the year is 11 million, that’s 22; so 22 is going to have to go to 77 over the next five or six quarters.

Taylor Harris - JP Morgan

Okay, that’s helpful. Thank you guys.

Tom Werner

Thank you. Have a great day.

Karen King

Thank you for joining us today. That concludes our call for the quarter and Regina we’re now ready to end the call.

Operator

This concludes Hospira’s second quarter 2009 earnings conference call. You may now disconnect.

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